BOJ Warns of Market Risks Amid AI-Driven Financial Boom

Bank of Japan (BOJ) Deputy Governor Shinichi Uchida has highlighted the dual impact of the global artificial intelligence boom on financial conditions. In a speech published on October 5, Uchida noted that AI has created a significant demand shock, boosting economic activity and asset prices. This has contributed to more accommodative financial conditions, though he cautioned that markets could face a correction if expected AI-related profits do not materialize.

Uchida explained that AI could enhance productivity and capital stock accumulation, potentially influencing a country’s natural rate of interest. However, the overall impact remains uncertain. The technology has already driven up stock prices and eased financial conditions, but large-scale bond issuance by AI companies has also put upward pressure on long-term interest rates. This creates a complex picture for assessing AI’s broader financial effects.

The BOJ is closely monitoring AI-driven demand, as it could push underlying inflation above the central bank’s 2% target, potentially necessitating further monetary tightening. Japan has already raised interest rates in June and September due to price pressures from the energy shock caused by the Iran war and a weaker yen, which has increased import costs. The country imports nearly all of its crude oil, with most supplies previously coming from the Middle East before the closure of the Strait of Hormuz.

Uchida emphasized that the BOJ will continue to analyze economic and financial data to understand AI’s full impact on demand, prices, productivity, and interest rates. While AI could support long-term productivity and investment, the financial impact may shift if expected earnings from AI investments do not materialize.